The Human Condition:

The Value of Money – June 23, 2013

We all worry about the value of money these days. Inflation, interest rates, foreign exchange rates, and market valuations all push the value of our dollars—or euros, or yen, or yuan—up or down. Wouldn’t it be nice to have a safe, stable, universal kind of money that was always worth what you paid for it with your hard work and didn’t erode over time? Is there a magic coin that governments couldn’t debase with their manipulations of the money supply, stealing value from the rest of us?

For a while, it seemed like the bitcoin would be an inflation-proof form of money. This is a “cryptocurrency” or “virtual currency” that apparently—because I’m no expert in its mechanics1—acquires value only because people are willing to trade it. Because it is not backed by any one government nor controlled by a central bank, it supposedly does not suffer from inflation and all the rest. But as people are discovering, its value can increase or decrease unexpectedly due to issues of liquidity: if you can’t find someone to take it, you can’t spend it. And when you convert your bitcoins back to “real world” money—as you must do eventually, unless you can live on bitcoin transactions as if you were trading Linden dollars in Second Life—then you’re back to dealing with inflation, deflation, and foreign exchange rates.

It seems to me one can look at money in two ways: first, what it represents in an economic system; and second, how it is handled within that system. Money as a representation of underlying value, and money as a medium of exchange.

As a representation of value, money is a stand-in for—a kind of frozen and tradable form of—human energy. When it results directly from human mental or physical effort, as wages or the receipt of payment for a product made through that effort, it represents captured human energy. When it earns interest on a loan or a dividend on an investment, it represents a share of the work which that loan or investment enables, such as providing the worker or the enterprise employing him with tools and raw materials. The interest or dividend represents human energy in two ways. First, it represents the sacrifice the person paying the interest or dividend is making, in terms of the value of future work, in order to obtain those tools or materials, or some desired item such as a house or car, before the work has been done and the money is in hand to pay for them. Second, it stands for the effort that the person making the loan or investment puts into delaying his own impulse toward instant gratification in favor of some other purpose, such as increasing social goods or multiplying the value of past efforts. Money in all its aspects represents human energy—whether it be muscle energy or brain energy, or some aspect of human choice—that has been expended over time.2

As a medium of exchange, money needs a certain identity. The king’s shilling must be intricately inscribed so that unlicensed “coiners” cannot easily duplicate it in debased metal. The U.S. dollar or EU euro must be made with special paper and printing so that counterfeiters can’t make more for themselves with a photocopier and pass them out at leisure. The credit card you carry must have some recognized standing—MasterCard, Visa, American Express—and the backing of a recognized bank so that people will know they can get their value out of the exchange. You’d be hard pressed to get anyone to accept Larry’s Credit Card issued by Harry’s Bank. Who are these people? What kind of scam is this?

It used to be that the medium of exchange needed to have scarcity value—coins were made of gold or silver, metals hard to find and extract, and so acquired human-energy value in their own right. Other forms of scarce “money” have been diamonds, bars of precious metal, bits of jewelry, or beads of wampum—that rare purple tint found in an otherwise white shell.3 The idea that money had to have value all on its own went away in the Renaissance, when Italian bankers began using letters of credit and promises to pay in place of moving around bags of gold. You could trust the banker’s correspondent in the faraway city where your goods were being trading: he knew your banker, had the gold secure in his vaults, and supported just as much trade going in the other direction, so it all evened out.

We might look at inflation as a natural phenomenon: the devaluation of past human effort. That is, we prize the work that goes into the things we need now or will need in the immediate future. We place less value on the things we already have that may be old or wearing out. So the money that was paid for them then, representing human energy that is no longer of much value, has decayed. Certainly, when Khufu’s pyramid was new, it was a thing of great value—eternal resting place to meet the needs of a godlike pharaoh, source of prestige and pride for the Egyptian people. Today, the energy that went into making it—the labor of thousands of people 4,500 years ago—has been totally discounted. As an Egyptian national treasure and remnant of world heritage, it is “priceless.” But if the pyramid disappeared tomorrow, no one would pay the millions of dollars required to rebuild it.

In this sense of money as a representation of value, it cannot be inflated. A government cannot immediately devalue the effort that went into earning it. The only way that money as frozen energy can be devalued is if the product of that energy has no value or reduced value. A worker who makes a shoddy product may release it to the market in return for the same amount of money as a quality product, but the product in use reveals its flaws and so reduces the value of the effort put into it. In that case, the particular piece of money—being equal to all the other monetary units received by the workers on the line, whether they make their products well or badly—actually gains in phantom value. The worker has gained money under false pretenses, for time and effort he did not expend or expended incompetently.

It is only when money is divorced from its relation to production and recompense, from its enabling function as capital, from its purchasing power as a loan to be repaid later, that money can be inflated. In a barter system, the value of goods and services remains relatively constant. One might for a while “bid up” the value of certain goods which draw attention and so attraction. One might “bid up” the value of some popular or rare human services against others that are mundane or easy to do. But the disjunction between effort and the value of money used to facilitate barter trade never becomes very great.

When government asserts its control, however, then the disjunction can arise and grow. When governments control the coinage, they can debase the metal in the coin or reduce its size, supposedly creating more “money” in the marketplace with the same amount of precious metal. When governments control the printing of money, they can print paper bills—even those supposedly backed by a fixed exchange rate with a certain value in metal or other “hard” currency—in excess of the value supposedly backing them. And when the value of the money in circulation is linked only to the government’s promise to make an exchange,4 or to some abstract value like the exchange rate or the government’s promise to pay future interest, then the value is in free fall, supported only by rumor and reminiscence of past value. That is, the value of money is divorced from effort—except in some oblique way relating to the roll-up of value in the gross domestic product and the import/export ratio.

The only way to make money “inflation proof,” then, would be to tie it back to human effort, time, and product value in some way with which the government cannot interfere. The problem is that all questions of value are ultimately malleable. There is no “gold standard,” no common accounting for a person’s time or effort. Even human life has no fixed value, no uncontested weregeld such as the old Anglo-Saxon and Salic laws tried to establish. If it’s your life or the life of a family member or loved one, the price is beyond counting. If it’s the life of your local shopkeeper or the farmer, miller, or baker who stock his shelves with bread, then you can establish a temporary economic value—in relation to your own needs. If it’s the life of an anonymous peasant in China or India, well then pfft!

Value is a personal, self-centered, temporary thing. We value the man or woman who can write a clever or useful bit of software—but only in terms of coding and design. We value a major league ballplayer—but only in terms of pitching and hitting. No one would pay Mark Zuckerberg $50 million to play in the World Series, or Tim Lincecum to write an iPhone app. The ten thousand stone cutters and strong backs who made Khufu’s pyramid are all dust now and, for all the good it does, the monument itself might as well be dust—except stone is so durable.

The value of money is a fluid and fragile thing, as is the economy in which it circulates. It is based on trust, expectation, hope, and fear, which are all human qualities. Look as hard as you might, you will find no external standard, no ultimate value, nothing that endures beyond tomorrow. Money, like the wink of a king, is in the eye of the beholder.

1. As I understand it, bitcoins are simply encrypted strings of data secured by a digital signature. You acquire them; you lock them up in a digital “wallet”; you transfer them to other people’s wallets. In place of a government, bank, or other financial institution—“a trusted third party”—to keep you from spending the same string of digits in two different places at once, the bitcoin system uses a system of timed identity stamps encoded into the string. You start by creating a virtual wallet that lets you accept a string of data from other users as payment for something you’re selling and then you pass that string along to still other users in exchange for something you’re buying, and each transaction carries a timed code. This is not all that different from the dollar-denominated strings of code you keep in a bank account and pay out with a check or credit card transaction through the bank’s clearing house or card service. What I don’t understand is where the first bitcoin came from, or how more bitcoins would be created sui generis as the volume of transactions increases and the value of the system swells. In a centrally supported system, the amount of dollars in circulation is controlled by the Federal Reserve or other central bank, which sells its own securities to financial institutions in the banking system and sets the amount of reserves the local bank must hold against the dollars it has on deposit. Without this ability to authorize the creation of new money, only that first bitcoin would ever be in circulation, passing from hand to hand. Supposedly, you can buy fresh bitcoins with conversion of the funds you already have in your local currency. But that just passes the value proposition back to your Federal Reserve or other central bank: if your dollars are eroding through inflation, you will need more of them this month to buy the same amount of bitcoins you bought last month. The value of each bitcoin might grow in terms of the dollars you put in. But the same could be said of converting your dollars to Swiss francs or Japanese yen for a transaction. And you arrive at the other side of the value equation when you cash out your bitcoins. The bitcoin is not really a hedge against inflation.

2. If this looks like a Marxist proposition—that all value derives from human labor—then so be it. Actually, I believe I’m expanding on the Marxists to account for human transactions such as loans and investments. I would say that all value comes from human energy, expressed both as physical labor and as willful intention and purpose. The desire to delay present gratification in order to invest in an enterprise is just as valid a human activity as the necessity of working each day for bread or a paycheck. Certainly, all value derives from human desires and activities. For example, consider that an uncut diamond the size of the Earth might lie at the heart of Jupiter, but since it has nothing to do with human beings—that is, we cannot get to it, touch it, treasure it, or trade it—that diamond has no value in our economic system.

3. Contrast this with a medium that has no human-energy or scarcity value. “Here, let me pay you with this rock.” “No thanks, there are plenty more in a pile over there.”

4. Like a Renaissance Italian banker who has promised to pay out his gold but issues other letters of credit instead and never has to open his vault.